Major investment banks are talking to regulators about routing their Asia-Pacific trading activities through Hong Kong instead of London, in a move that would have limited effect on jobs but would shift global finance’s centre of gravity further away from the UK capital after Brexit.
Morgan Stanley is laying the groundwork for a new Hong Kong “booking entity” to handle the trades of APAC clients, whose activity makes up a large portion of its London-based markets business, people familiar with the bank’s plans said.
Several other investment banks are also talking to the Hong Kong Monetary Authority about handling more of their APAC business locally. The regulator told the FT it was “gearing up it resources/staff” to handle “banks’ interest in moving the booking and management of their Asian risks to Hong Kong”.
Banks book much of their global markets business through London because it is more capital efficient to centralise activity in a single entity, and because some regional regulators lack the sophistication to oversee complex markets business.
But London’s status as a global booking centre was hobbled by the UK’s decision to quit the EU, which prompted banks to create structures so they can book EU trades and service EU clients from cities such as Frankfurt and Paris.
Bankers say they now feel pressure from global regulators to hold their risks closer to their origination, and that more regulators are developing regimes to make regional booking centres viable.
Hong Kong took the first major step in April by launching a consultation on a new regulatory regime for derivatives.
A person familiar with Morgan Stanley’s position said it hoped Hong Kong could become a viable option for bonds and other trading assets, paving the way for the movement of almost all of Morgan Stanley’s APAC trading book from London to Hong Kong in the next few years.
“Booking in London has been a legacy issue . . . Asian regulators have not had comparable regimes,” the person said, adding that the expected cost impact from capitalising a separate Asian booking centre would not be “massive”.
A person at another large US bank said it was asking Hong Kong for more detail on the breadth of instruments where capital treatments are under review. The HKMA has not yet responded to the bank.
A third US bank said its APAC trading “may continue as it is” after Brexit or it could be done elsewhere in Europe or “through a separate Asian entity”.
Some banks already book some of their APAC trades locally and some may consider Singapore rather than Hong Kong.
The HKMA said it welcomed banks booking Asian risks through Hong Kong “so long as they are supported by adequate capital buffer, and robust risk management and internal governance”.
Banks have historically been concerned that the HKMA could not assess the complex models they use to calculate capital requirements for their trading books, and would force them to use the harsher “standardised” capital regime.
“In view of banks’ interest in moving the booking and management of their Asian risks to Hong Kong, the HKMA is in the process of gearing up its resources/staff to handle the model approval process and supervision of the activities,” the HKMA said.
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